WASHINGTON (7/27/11)--In response to certain credit union concerns regarding a recent agency communication related to liquidation of two bridge corporate credit unions, the Credit Union National Association (CUNA) has secured further information from the National Credit Union Administration (NCUA) in the form of a Q-and-A. The NCUA recently sent letters to credit unions belonging to Western Bridge Corporate FCU and U.S. Central Bridge Corporate FCU, which have approved plans to reorganize as United Resources FCU and—for U.S. Central’s payment business—as PayNet. Those transitions will involve the liquidation of the two bridges and the creation of two new corporate charters, the NCUA letter stated. Credit unions with certificates of deposit (CDs) in Western Bridge or U.S. Central Bridge that mature after the date of their bridge’s liquidation will be paid the full principal amount of the CD at the time of liquidation. The credit union will also receive interest accrued and payable to the account on the CD up to the point of liquidation. To help stabilize corporate credit unions in crisis in 2009, the NCUA asked credit unions who were members to leave or deposit funds with their corporates. The agency also announced the Temporary Corporate CU Share Guarantee Program. That program, currently slated to run through the end of 2012, provided credit unions with a federal guarantee for any shares that were in excess of the $250,000 federal share insurance cap. A number of credit unions have expressed concerns because some of the CDs that will be liquidated had maturities well into next year. The yields anticipated through maturity are significantly higher than any re-investment rate a credit union is likely to find in the current market. “The dismay is understandable,” said CUNA Chief Economist Bill Hampel. “Credit unions believe they stepped up to the plate to provide liquidity in a time of need, and are now troubled to learn they will earn a lower total return than they calculated based on the ending date of the guarantee program.” Because of the concern expressed by credit unions, CUNA posed a question to NCUA about the payout of CDs at the two liquidating bridges: Q: Did NCUA consider continuing the higher dividend rates until original maturity, or paying off the CDs at a premium to cover the reduced investment yield the depositing credit unions would receive when they reinvest the funds? NCUA: The legal obligation under the Temporary Corporate Credit Union Share Guarantee program stipulated NCUA would pay all principal plus interest accrued to the account at the time of liquidation. This practice is consistent with how NCUA pays out shares under its deposit insurance program. The temporary guarantee did not stipulate it would pay future dividends from the point of liquidation. The NCUA board deliberated whether to extend the liability to the Corporate Stabilization Fund to pay dividends beyond the legal requirement, but concluded that such an action would add unwarranted costs to the Corporate System Resolution Plan. Had the NCUA Board decided to extend the liability to the maturity of the CDs, all federally-insured credit unions would have paid increased assessments over time. Member advisory councils for Western Bridge and US Central Bridge developed the business plans for the proposed United Resources Corporate and PayNet Corporate charters. These member-driven business plans stipulated that the new charters would not assume the affected CDs. Accordingly, once the certificates become part of the bridge liquidation estate, it will trigger NCUA’s obligation to pay out the CDs under the procedures of the temporary guarantee. Q: Why did NCUA decide not to cover the higher yields until original maturity or until the end of the Temporary Corporate Credit Union Share Guarantee program? NCUA: A decision to cover the affected CDs would have added costs to the corporate stabilization fund and exceeded the legal requirements of the Temporary Corporate Credit Union Share Guarantee program. Thus, if NCUA had paid the dividends beyond the legal obligation, approximately 7,300 federally insured credit unions would have borne the costs for the benefit of 200 credit unions, including corporates, with the CDs. This was one of the considerations which served as the basis for not paying out liabilities beyond the guarantee obligation. Q: How much would it have cost the agency to cover the higher yields until maturity or the end of the program by paying off all the CDs at a premium? NCUA: The associated premium to satisfy all future dividends would have been approximately $30 million. This was one of the considerations which served as the basis for not paying out liabilities beyond the guarantee obligation. Q: Roughly what proportion of the CDs that will be paid off before maturity were purchased by credit unions after the Temporary Corporate Credit Union Share Guarantee became effective and NCUA requested credit unions continue to provide liquidity to the conserved corporates? NCUA: CDs with maturities beyond the expected dates of resolution and purchased after the Temporary Corporate Credit Union Share Guarantee became effective represent 26 percent of the $30 million premium discussed in the question above. Said another way, nearly 74 percent of the premium ($22 million) is associated with CDs that were purchased prior to the Temporary Share Guarantee and were subject to loss of principal had NCUA not implemented the program. Many of these credit unions had tens, if not hundreds, of millions of dollars in certificates that largely would have been uninsured. Q: How much would it have cost to cover the higher yields just on those CDs that were purchased after the time of the Temporary Share Guarantee? NCUA: The premium associated with CDs purchased after the Temporary Share Guarantee became effective in January 2009 would be approximately $8 million.